filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding growth opportunities, including for revenue and our end markets, strength and drivers of the markets into which we sell, sales funnels, our strategic direction, new product and service introductions and the position of our current products and services, market demand for and adoption of our products, the ability of our products and solutions to address customer needs and meet industry requirements, our focus on differentiating our product solutions, improving our customers’ experience and growing our earnings, future financial results, our operating margin, mix, our investments, including in manufacturing infrastructure, research and development and expanding and improving our applications and solutions portfolios, expanding our position in developing countries and emerging markets, our focus on balanced capital allocation, our contributions to our pension and other defined benefit plans, impairment of goodwill and other intangible assets, the impact of foreign currency movements, our hedging programs and other actions to offset the effects of tariffs and foreign currency movements, our future effective tax rate, tax valuation allowance and unrecognized tax benefits, the impact of local government regulations on our ability to pay vendors or conduct operations, our ability to satisfy our liquidity requirements, including through cash generated from operations, the potential impact of adopting new accounting pronouncements, indemnification, source and supply of materials used in our products, our sales, our purchase commitments, our capital expenditures, the integration and effects of our acquisitions and other transactions, our stock repurchase program and dividends, macroeconomic and geopolitical uncertainties, interest rate and inflationary pressures, and the potential or anticipated direct or indirect impact of COVID-19 on our business that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Part II Item 1A and elsewhere in this Form 10-Q.
Basis of Presentation
The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, comprehensive income (loss) or cash flows. Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal periods.
Executive Summary
Agilent Technologies, Inc. ("we," "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
COVID-19 Pandemic
Both our domestic and international operations have been and continue to be affected by the ongoing global pandemic of a novel strain of coronavirus (“COVID-19”) and the resulting volatility and uncertainty it has caused. In the first quarter of fiscal year 2023, many businesses and countries, including China where we maintain significant operations, continued responding to the evolving nature of the spread of the virus.
While conditions related to the COVID-19 pandemic have improved since 2021, the pandemic continues to be dynamic, and near-term challenges across the economy remain. The ongoing effects of COVID-19 remain difficult to predict due to numerous uncertainties, including the severity, duration and resurgence of the outbreak, new variants and the contagiousness of these new variants, the effectiveness of health and safety measures including vaccines and therapies, government and community responses including additional lockdowns, the pace and strength of the economic recovery, supply chain pressures, delivery and installation delays due to variable access to customer sites, among others. We will continue to actively monitor the effects of the pandemic and will continue to take appropriate steps to mitigate the impacts to our employees and on our business results.
Actual Results
Net revenue of $1,756 million for the three months ended January 31, 2023 increased 5 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 5 percentage points when compared to the same period last year. Net revenue increased in all our
segments, geographic regions and most of our end markets. Revenue generated by our life sciences and applied markets business in the three months ended January 31, 2023 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023, had an overall unfavorable impact on revenue growth of 5 percentage points when compared to the same period last year. Revenue generated by our diagnostics and genomics business for the three months ended January 31, 2023 increased 1 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 4 percentage points when compared to the same period last year. Revenue generated by our Agilent CrossLab business in the three months ended January 31, 2023 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 7 percentage points when compared to the same period last year.
Net income for the three months ended January 31, 2023 was $352 million compared to net income of $283 million for the corresponding period last year. In the three months ended January 31, 2023, cash provided by operations was $296 million compared to cash provided by operations of $255 million in the same period last year.
Dividends. During the three months ended January 31, 2023, we paid cash dividends of $0.225 per common share or $67 million on the company's common stock. During the three months ended January 31, 2022, we paid cash dividends of $0.210 per common share or $63 million on the company's common stock.
On February 22, 2023, our board of directors declared a quarterly dividend of $0.225 per share of common stock or approximately $67 million which will be paid on April 26, 2023 to all shareholders of record at the close of business on April 4, 2023. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
2021 Repurchase Program. During the three months ended January 31, 2023, we repurchased and retired 499,000 shares for $75 million under the 2021 repurchase authorization. During the three months ended January 31, 2022, we repurchased and retired 2.900 million shares for $447 million under this authorization. As of January 31, 2023, we had remaining authorization to repurchase up to approximately $363 million of our common stock under the 2021 repurchase program. On March 1, 2023, the 2021 repurchase program was terminated and the remaining authorization of $339 million expired.
2023 Repurchase Program. On January 9, 2023, we announced that our board of directors had approved a share repurchase program (the "2023 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2023 repurchase program authorizes the purchase of up to $2.0 billion of our common stock at the company's discretion and has no fixed termination date. The 2023 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. The 2023 repurchase program commenced on March 1, 2023, and also terminated and replaced the 2021 repurchase program.
Looking forward, we remain focused on improving our customers’ experience, differentiating product solutions and productivity. We expect to continue to face interest rate and inflationary pressures which we will continue to mitigate through targeted pricing and various other strategies. While we anticipate an uncertain macroeconomic environment in fiscal year 2023, we remain optimistic about our long-term growth opportunities in all of our key end markets in fiscal year 2023.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. The preparation of condensed consolidated financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, retirement and post-retirement benefit plan assumptions, valuation of goodwill and purchased intangible assets and accounting for income taxes. There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.
Adoption of New Pronouncements
See Note 2, “New Accounting Pronouncements,” to the condensed consolidated financial statements for a description of new accounting pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities and equity are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue of 5 percentage points when compared to the same period last year. When movements in foreign currency exchange rates have a negative impact on revenue, they will also have a positive impact by reducing our costs and expenses. We calculate the impact of movements in foreign currency exchange rates by applying the actual foreign currency exchange rates in effect during the last month of each quarter of the current year to both the applicable current and prior year periods. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the condensed consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (up to a rolling twelve-month period). We may also hedge equity balances denominated in foreign currency on a long-term basis. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.
Results from Operations
Net Revenue
| Three Months Ended | Year over Year Change | ||||||||||||||||||||||||||||||||||
| January 31, | Three | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,323 | $ | 1,263 | 5% | ||||||||||||||||||||||||||||||
| Services and other | 433 | 411 | 5% | ||||||||||||||||||||||||||||||||
| Total net revenue | $ | 1,756 | $ | 1,674 | 5% |
Net revenue of $1,756 million for the three months ended January 31, 2023 increased 5 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable
impact on revenue growth of 5 percentage points when compared to the same period last year. In the three months ended January 31, 2023, net revenue increased in all of our segments, geographic regions and in most of our end markets when compared to the same period last year.
Revenue from products for the three months ended January 31, 2023 increased 5 percent when compared to the same period last year. Product revenue growth in the three months ended January 31, 2023 was driven by our liquid chromatography, spectroscopy, nucleic acid solutions and cell analysis businesses.
Services and other revenue for the three months ended January 31, 2023 increased 5 percent when compared to the same period last year. Services and other revenue consist of contract repair, preventative maintenance, compliance services, relocation services, installation services and consulting services related to the companion diagnostics and nucleic acid solutions businesses. For the three months ended January 31, 2023, service revenue increases reflected strong growth from the majority of the services portfolio.
Net Revenue By Segment
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue by segment: | ||||||||||||||||||||||||||||||||||||||
| Life sciences and applied markets | $ | 1,033 | $ | 976 | 6% | |||||||||||||||||||||||||||||||||
| Diagnostics and genomics | 342 | 339 | 1% | |||||||||||||||||||||||||||||||||||
| Agilent CrossLab | 381 | 359 | 6% | |||||||||||||||||||||||||||||||||||
| Total net revenue | $ | 1,756 | $ | 1,674 | 5% |
Revenue in the life sciences and applied markets business for the three months ended January 31, 2023 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 5 percentage points when compared to the same period last year. For the three months ended January 31, 2023, we saw revenue growth across most of our end markets led by strong revenue growth within the chemical and advanced materials, the pharmaceutical and the environmental and forensics markets when compared to the same period last year.
Revenue in the diagnostics and genomics business for the three months ended January 31, 2023, increased 1 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 4 percentage points when compared to the same period last year. For the three months ended January 31, 2023, revenue growth in the pharmaceutical market was strong led by our nucleic acid solutions business which was partially offset by a decline in our diagnostics and clinical and academia and government markets.
Revenue generated by Agilent CrossLab in the three months ended January 31, 2023, increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 7 percentage points when compared to the same period last year. For the three months ended January 31, 2023, we saw revenue growth across all of our end markets led by strong revenue growth from the pharmaceutical market when compared to the same period last year.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Total gross margin | 55.1 | % | 54.3 | % | 1 ppt | |||||||||||||||||||||||||||||||||
| Research and development | $ | 123 | $ | 117 | 5% | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 419 | $ | 417 | 1% | |||||||||||||||||||||||||||||||||
| Operating margin | 24.3 | % | 22.5 | % | 2 ppts | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 426 | $ | 376 | 13% |
Total gross margin for the three months ended January 31, 2023 increased 1 percentage point when compared to the same period last year. Gross margin for the three months ended January 31, 2023 was impacted by higher sales volume, targeted sales price increases, and lower intangible amortization expense partially offset by unfavorable impact of currency movements, higher wages and input costs.
Research and development expenses for the three months ended January 31, 2023 increased 5 percent when compared to the same period last year. Research and development expenses for the three months ended January 31, 2023 increased due to higher wages and program costs in our life sciences and applied markets and diagnostics and genomics businesses partially offset by the favorable impact of currency movements.
Selling, general and administrative expenses for the three months ended January 31, 2023 increased 1 percent when compared to the same period last year. The increase in the three months ended January 31, 2023, was due to higher wages mostly offset by lower intangible amortization expense, sales commissions and the favorable impact of currency movements.
Total operating margin for the three months ended January 31, 2023 increased 2 percentage points when compared to the same period last year. Operating margin for the three months ended January 31, 2023 increased primarily due to higher sales volume.
Income from operations for the three months ended January 31, 2023 increased $50 million or 13 percent on corresponding revenue increase of $82 million.
At January 31, 2023, our headcount was approximately 18,300 as compared to approximately 17,200 at January 31, 2022. The increase in headcount was to address the increase in business.
Other income (expense), net
In the three months ended January 31, 2023 other income and expense, net includes a net loss on equity securities of $10 million. In the three months ended January 31, 2023 other income and expense, net also includes income of $3 million related to the provision of site service costs to, and lease income from Keysight Technologies, Inc. The costs associated with these services are reported within income from operations.
In the three months ended January 31, 2022 other income and expense, net includes net loss on the fair value of equity investments of approximately $47 million. In the three months ended January 31, 2022 other income and expense, net also includes income of $3 million related to the provision of site service costs to, and lease income from Keysight Technologies, Inc. The costs associated with these services are reported within income from operations.
Income Taxes
For the three months ended January 31, 2023, our income tax expense was $58 million with an effective tax rate of 14.1 percent. Our effective tax rate increased in 2023 compared to 2022 primarily due to the mandatory capitalization of research and development expenses, which became effective for Agilent in the first quarter of 2023, due to a change in tax law from the Tax Cuts and Jobs Act of 2017. For the three months ended January 31, 2023, our effective tax rate and the resulting provision for income taxes were also impacted by the excess tax benefits from stock-based compensation of $12 million along with the expiration of various foreign statutes of limitations which resulted in the recognition of previously unrecognized tax benefits of $7 million.
For the three months ended January 31, 2022, our income tax expense was $36 million with an effective tax rate of 11.3 percent. The income taxes for the three months ended January 31, 2022 include the excess tax benefits from stock-based compensation of $16 million. For the three months ended January 31, 2022, our effective tax rate and the resulting provision for income taxes were also impacted by the expiration of various foreign statutes of limitations which resulted in the recognition of previously unrecognized tax benefits of $8 million.
In the U.S., tax years remain open back to the year 2018 for federal income tax purposes and for significant states. In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2013.
With these jurisdictions and the U.S., it is reasonably possible there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will be partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
Segment Overview
We continue to have three business segments comprised of life sciences and applied markets, diagnostics and genomics and Agilent CrossLab.
Life Sciences and Applied Markets
Our life sciences and applied markets business provides application-focused solutions that include instruments, consumables and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular and cellular level. Key product categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS") systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems; inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave plasma-atomic emission spectrometry ("MP-AES") instruments; inductively coupled plasma optical emission spectrometry ("ICP-OES") instruments; raman spectroscopy; cell analysis plate based assays; flow cytometer; real-time cell analyzer; cell imaging systems; microplate reader; laboratory software for sample tracking; information management and analytics; laboratory automation and robotic systems; dissolution testing; vacuum pumps and measurement technologies. Our consumables portfolio is designed to improve customer outcomes. Most of the portfolio is vendor neutral, meaning Agilent can serve and supply customers regardless of their instrument purchase choices. Solutions range from chemistries to supplies. Key product categories in consumables include GC and LC columns, sample preparation products, custom chemistries, and a large selection of laboratory instrument supplies.
Net Revenue
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,033 | $ | 976 | 6% |
Life sciences and applied markets business revenue for the three months ended January 31, 2023 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 5 percentage points when compared to the same period last year.
Geographically, revenue increased 5 percent in the Americas with no currency impact, increased 2 percent in Europe with a 9 percentage point unfavorable currency impact and increased 9 percent in Asia Pacific with a 7 percentage point unfavorable currency impact for the three months ended January 31, 2023 compared to the same period last year. For the three months ended January 31, 2023, revenue growth in all regions was driven by our liquid chromatography, spectroscopy and cell analysis businesses when compared to the same period last year.
For the three months ended January 31, 2023, revenue by end markets was strong across most end markets. Revenue growth in the pharmaceutical market was strong and primarily driven by our liquid chromatography and cell analysis businesses when compared to the same period last year. Revenue growth in the chemicals and advanced materials market was strong and mainly driven by strength in our spectroscopy and liquid chromatography businesses. Revenue growth in the environmental and forensics market was strong mainly driven by liquid chromatography and gas chromatography mass spectrometry businesses when compared to the same period last year. Revenue growth in the food market was moderate and primarily driven by our spectroscopy and liquid chromatography businesses. Revenue in the diagnostics and clinical market declined moderately driven by weakness in our liquid chromatography mass spectrometry business partially offset by strength in our cell analysis business.
Looking forward, despite uncertainties around macroeconomic and geopolitical conditions as well as COVID-19 and inflationary pressures, we are optimistic about our long-term growth opportunities in the life sciences and applied markets as our broad portfolio of products and solutions are well suited to address customer needs. While we anticipate volatility in our markets, we expect long term growth across most end markets as we continue to invest in expanding and improving our applications and solutions portfolio.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 61.2 | % | 60.5 | % | 1 ppt | |||||||||||||||||||||||||||||||||
| Research and development | $ | 77 | $ | 74 | 4% | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 241 | $ | 234 | 3% | |||||||||||||||||||||||||||||||||
| Operating margin | 30.4 | % | 28.9 | % | 2 ppts | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 314 | $ | 282 | 11% |
Gross margin for products and services for the three months ended January 31, 2023, increased 1 percentage point when compared to the same period last year. Gross margin for the three months ended January 31, 2023 was impacted by higher sales volume, targeted price increases and lower warranty cost partially offset by higher wages, input costs and the unfavorable impact of currency movements.
Research and development expenses for the three months ended January 31, 2023, increased 4 percent when compared to the same period last year. Research and development expenses for the three months ended January 31, 2023 increased due to higher wages and program investments in liquid chromatography mass spectrometry and digital lab platform technology.
Selling, general and administrative expenses for the three months ended January 31, 2023, increased 3 percent when compared to the same period last year. Selling, general and administrative expenses for the three months ended January 31, 2023, increased mostly due to higher wages partially offset by lower commissions and the favorable impact of currency movements.
Operating margin for products and services for the three months ended January 31, 2023 increased 2 percentage points when compared to the same period last year. Operating margin for the three months ended January 31, 2023 was impacted by higher sales volume with improved gross margins and lower spending partially offset by higher wages.
Income from operations for the three months ended January 31, 2023, increased $32 million or 11 percent on a corresponding revenue increase of $57 million. Income from operations for the three months ended January 31, 2023 increased primarily due to higher sales volume and lower commissions partially offset by higher wages and investments in liquid chromatography mass spectrometry and digital lab platform technology and the unfavorable impact of currency movements.
Diagnostics and Genomics
Our diagnostics and genomics business includes the genomics, nucleic acid contract manufacturing and research and development, pathology, companion diagnostics, reagent partnership and biomolecular analysis businesses.
Our diagnostics and genomics business is comprised of six areas of activity providing active pharmaceutical ingredients ("APIs") for oligo-based therapeutics as well as solutions that include reagents, instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate samples at the cellular and molecular level. First, our genomics business includes arrays for DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling, as well as next generation sequencing ("NGS") target enrichment and genetic data management and interpretation support software. This business also includes solutions that enable clinical labs to identify DNA variants associated with genetic disease and help direct cancer therapy. Second, our nucleic acid solutions business is a contract and development manufacturing organization that provides services related to and the production of synthesized oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as API in a class of drugs that utilize nucleic acid molecules for disease therapy. Third, our pathology solutions business is focused on product offerings for cancer diagnostics and anatomic pathology workflows. The broad portfolio of offerings includes immunohistochemistry ("IHC"), in situ hybridization ("ISH"), hematoxylin and eosin ("H&E") staining and special staining. Fourth, we also collaborate with a number of major pharmaceutical companies to develop new potential tissue and liquid-based pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy. Fifth, the reagent partnership business provides clinical flow cytometry reagents for routine cancer diagnostics. This business also provides bulk antibodies as raw materials and associated assay development services to IVD manufacturers, biotechnology and pharmaceutical companies. Finally, our biomolecular analysis business provides complete workflow solutions, including instruments, consumables and software, for quality control analysis of nucleic acid samples. Samples are analyzed using quantitative and qualitative techniques to ensure accuracy in further genomics analysis techniques including NGS, utilized in clinical and life science research applications.
Net Revenue
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 342 | $ | 339 | 1% |
Diagnostics and genomics business revenue for the three months ended January 31, 2023 increased 1 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 4 percentage points when compared to the same period last year.
Geographically, revenue increased 7 percent in the Americas with no currency impact, decreased 1 percent in Europe with an 8 percentage point unfavorable currency impact and decreased 16 percent in Asia Pacific with a 10 percentage point unfavorable currency impact for the three months ended January 31, 2023 compared to the same period last year. For the three months ended January 31, 2023, the increase in the Americas was driven by strong performance in our nucleic acid solutions,
pathology, reagent partnership and biomolecular analysis businesses and was partially offset by declines in companion diagnostics and genomics businesses. In Europe, the unfavorable impact of currency on revenue was partially offset by strong growth in the reagent partnership business. The decline in Asia Pacific revenue was driven by China.
For the three months ended January 31, 2023, revenue growth in the pharmaceutical market was driven by our nucleic acid solutions business. The unfavorable currency impact and revenue decline in the genomics portfolio in our diagnostics and clinical market was partially offset by strong growth in the reagent partnership business.
Looking forward, despite macroeconomic and geopolitical and COVID-19 uncertainties, we are optimistic about our long-term growth opportunities in our end markets and continue to invest in expanding and improving our applications and solutions portfolio. We remain positive about our growth in our end markets as our product portfolio around OMNIS and PD-L1 assays continues to gain strength with our customers in clinical oncology applications, and our next generation sequencing related solutions continue to be adopted. Market demand in the nucleic acid solutions business related to therapeutic oligo programs continues, and with the planned expansion of our nucleic acid solutions production facility in Frederick, Colorado, we are well positioned to serve more of the market demand. We are expanding our capabilities in NGS-based cancer diagnostics and will provide innovative technology to further serve the needs of the fast-growing precision medicine market. We will continue to invest in research and development and seek to expand our position in developing countries and emerging markets.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 51.2 | % | 52.8 | % | (2) ppts | |||||||||||||||||||||||||||||||||
| Research and development | $ | 37 | $ | 34 | 11% | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 79 | $ | 77 | 2% | |||||||||||||||||||||||||||||||||
| Operating margin | 17.2 | % | 20.1 | % | (3) ppts | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 59 | $ | 68 | (13)% |
Gross margin for products and services for the three months ended January 31, 2023, decreased 2 percentage points when compared to the same period last year. Gross margin for the three months ended January 31, 2023 decreased due to unfavorable impact of currency movements, unfavorable product mix and higher wages.
Research and development expenses for the three months ended January 31, 2023, increased 11 percent when compared to the same period last year. Research and development expenses for the three months ended January 31, 2023 increased primarily due to higher wages and program investments in our next generation products in our genomics business.
Selling, general and administrative expenses for the three months ended January 31, 2023, increased 2 percent when compared to the same period last year. Selling, general and administrative expenses for the three months ended January 31, 2023 increased due to higher wages which were partially offset by the favorable impact of currency movements.
Operating margin for products and services for the three months ended January 31, 2023 decreased 3 percentage points when compared to the same period last year. The decrease in operating margin for the three months ended January 31, 2023 was primarily due to higher cost of sales and operating expenses.
Income from operations for the three months ended January 31, 2023 decreased $9 million or 13 percent on a corresponding revenue increase of $3 million. Income from operations for the three months ended January 31, 2023 decreased due to unfavorable impact of currency movements, unfavorable product mix and higher wages.
Agilent CrossLab
The Agilent CrossLab business spans the entire lab with its extensive services portfolio, which is designed to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning we can serve and supply customers regardless of their instrument purchase choices. The services portfolio include repairs, parts, maintenance, installations, training, compliance support, software as a service, asset management, consulting and various other custom services to support the customers' laboratory operations. Custom services are tailored to meet the specific application needs of various industries and to keep instruments fully operational and compliant with the respective industry requirements.
Net Revenue
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| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 381 | $ | 359 | 6% |
Agilent CrossLab business revenue for the three months ended January 31, 2023 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2023 had an overall unfavorable impact on revenue growth of 7 percentage points when compared to the same period last year.
Geographically, revenue increased 16 percent in the Americas with no currency impact, was flat in Europe with a 10 percentage point unfavorable currency impact and was flat in Asia Pacific with a 10 percentage point unfavorable currency impact for the three months ended January 31, 2023 compared to the same period last year. For the three months ended January 31, 2023, revenue growth in all three regions reflected consistent high demand for repair services, compliance services, installation services and consultative services across the entire portfolio.
For the three months ended January 31, 2023, we saw strong revenue growth across all of the end markets led by the pharmaceutical market when compared to the same period last year.
Looking forward, Agilent CrossLab services are well positioned to continue their success in our key end markets by supporting a growing installed base of instruments. Digital and remote capabilities will continue to be a key factor in improving the service quality and the experience to customers. Geographically, the business is well diversified across all regions to take advantage of local market opportunities and to hedge against weakness in any one region.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 48.5 | % | 47.5 | % | 1 ppt | |||||||||||||||||||||||||||||||||
| Research and development | $ | 9 | $ | 8 | 5% | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 73 | $ | 72 | 2% | |||||||||||||||||||||||||||||||||
| Operating margin | 27.0 | % | 25.2 | % | 2 ppts | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 103 | $ | 91 | 14% |
Gross margin for the three months ended January 31, 2023 increased 1 percentage point when compared to the same period last year. Gross margin for the three months ended January 31, 2023 was impacted by higher sales volume and targeted price increases that improved margins, which were partially offset by higher wages, unfavorable impact of currency movements and service delivery costs for logistics and parts.
Research and development expenses for the three months ended January 31, 2023 increased 5 percent when compared to the same period last year. Research and development expenses for the three months ended January 31, 2023 increased mainly due to higher wages partially offset by the favorable impact of currency movements.
Selling, general and administrative expenses for the three months ended January 31, 2023 increased 2 percent when compared to the same period last year. Selling, general and administrative expenses for the three months ended January 31, 2023 increased primarily due to higher wages partially offset by the favorable impact of currency movements.
Operating margin for products and services for the three months ended January 31, 2023 increased 2 percentage points when compared to the same period last year. Operating margin for the three months ended January 31, 2023 increased mostly driven by higher sales volume with improved gross margins in addition to lower expenses.
Income from operations for the three months ended January 31, 2023 increased $12 million or 14 percent on a corresponding revenue increase of $22 million Income from operations for the three months ended January 31, 2023 increased primarily due to higher sales volume partially offset by the unfavorable impact of currency movements.
FINANCIAL CONDITION
Liquidity and Capital Resources
We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months and beyond, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.
Our financial position as of January 31, 2023 consisted of cash and cash equivalents of $1,250 million as compared to $1,053 million as of October 31, 2022.
We may, from time to time, retire certain outstanding debt of ours through open market cash purchases, privately-negotiated transactions or otherwise. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Net Cash Provided by Operating Activities
Net cash inflow from operating activities was $296 million for the three months ended January 31, 2023 compared to cash inflow of $255 million for the same period in 2022. Net cash paid for income taxes in the three months ended January 31, 2023 was approximately $17 million compared to income taxes paid of $22 million for the same period in 2022. Other assets and liabilities, for the three months ended January 31, 2023, had cash inflow of $85 million compared to cash inflow of $40 million for the same period in 2022.
In the three months ended January 31, 2023, accounts receivable used cash of $5 million compared to cash used of $46 million for the same period in 2022. Days’ sales outstanding ("DSO") as of January 31, 2023 was 75 days when compared to 65 days as of January 31, 2022. The increase in DSO was due to higher shipments near the end of the quarter. In addition, DSO increased due to higher unbilled receivables driven by growth in our nucleic acid solutions business, that has a longer cash conversion cycle. Cash used for inventory was $69 million for the three months ended January 31, 2023 compared to cash used of $54 million for the same period in 2022. Inventory days on-hand was 127 days as of January 31, 2023 compared to 103 days as of January 31, 2022 mainly due to increased inventory levels to meet customer needs and to compensate for long lead time in ordering from our suppliers. In the three months ended January 31, 2023, accounts payable used cash of $27 million compared to cash provided of $37 million for the same period in 2022.
The employee compensation and benefits liability used cash of $174 million for the three months ended January 31, 2023 compared to cash used of $210 million for the same period in 2022. This was largely due to a decrease in variable and incentive payments which were $185 million in 2023 compared to $201 million in 2022. In addition, the lower use of cash was due to an increase in the vacation liability.
We contributed approximately $5 million to our defined benefit plans in both the three months ended January 31, 2023 and 2022. Our annual contributions are highly dependent on the relative performance of our assets versus our projected
liabilities, among other factors. We expect to contribute approximately $11 million to our defined benefit plans during the remainder of 2023.
Net Cash Used in Investing Activities
Net cash used in investing activities was $104 million for the three months ended January 31, 2023 as compared to net cash used in investing activities of $79 million in the same period of 2022. In the three months ended January 31, 2023, cash used of $30 million was related to our acquisition of Avida Biomed.
Investments in property, plant and equipment were $76 million for the three months ended January 31, 2023 compared to $75 million in the same period of 2022. These continued investments in property plant and equipment are primarily due to the planned expansion of our nucleic acid solutions production facility in Frederick, Colorado. In January 2023, we announced that we will be investing $725 million to further expand our manufacturing capacity for production of nucleic acid based therapeutics in Frederick, Colorado. Hence, we expect that total capital expenditures for the current year will be approximately $500 million. Some of our investment may be eligible to qualify for reimbursement incentives, which will not fully be known until the expansion is substantially complete.
Net Cash Used in Financing Activities
Net cash used in financing activities for the three months ended January 31, 2023 was $17 million compared to net cash used in financing activities of $546 million for the same period of 2022.
Treasury Stock Repurchases
Our 2021 repurchase program authorizes the purchase of up to $2.0 billion of our common stock at the company's discretion and has no fixed termination date. During the three months ended January 31, 2023 and 2022 we repurchased and retired 499,000 shares for $75 million and 2.900 million shares for $447 million, respectively, under this authorization. As of January 31, 2023, we had remaining authorization to repurchase up to approximately $363 million of our common stock under the 2021 repurchase program. On March 1, 2023, the 2021 repurchase program was terminated and the remaining authorization of $339 million expired.
On January 9, 2023, we announced that our board of directors had approved a share repurchase program (the "2023 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2023 repurchase program authorizes the purchase of up to $2.0 billion of our common stock at the company's discretion and has no fixed termination date. The 2023 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. The 2023 repurchase program commenced on March 1, 2023, and also terminated and replaced the 2021 repurchase program.
Dividends
During the three months ended January 31, 2023 and 2022, we paid cash dividends of $0.225 per common share or $67 million, and $0.210 per common share or $63 million, respectively, on the company's common stock. On February 22, 2023, our board of directors declared a quarterly dividend of $0.225 per share of common stock or approximately $67 million which will be paid on April 26, 2023 to all shareholders of record at the close of business on April 4, 2023. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Contingent Consideration Payment
During the three months ended January 31, 2023, we paid $65 million in contingent consideration payments related to the achievement of a certain technical milestone associated with our acquisition of Resolution Bioscience. Of the $65 million payment, $3 million is included as an outflow in cash from operations.
Credit Facilities and Short-Term Debt
On March 13, 2019, we entered into a credit agreement with a group of financial institutions which, as amended, provided for a $1 billion five-year unsecured credit facility that will expire on March 13, 2024 and incremental term loan facilities in an aggregate amount of up to $500 million. On April 21, 2021, we entered into an incremental assumption agreement, pursuant to which the aggregate amount available for borrowing under the revolving credit facility was increased to
$1.35 billion, and the aggregate amount available for incremental facilities was refreshed to remain at $500 million. As of January 31, 2023, we had no borrowings outstanding under the credit facility and no borrowings under the incremental facilities. We were in compliance with the covenants for the credit facility during the three months ended January 31, 2023.
Commercial Paper
Under our U.S. commercial paper program, the company may issue and sell unsecured, short-term promissory notes in the aggregate principal amount not to exceed $1.35 billion with up to 397-day maturities. At any point in time, the company intends to maintain available commitments under its revolving credit facility in an amount at least equal to the amount of the commercial paper notes outstanding. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The proceeds from issuances under the program may be used for general corporate purposes. During the three months ended January 31, 2023, we borrowed $527 million and repaid $324 million. As of January 31, 2023, we had borrowings of $238 million outstanding under our U.S. commercial paper program and had a weighted average annual interest rate of 4.67 percent.
Long-Term Debt
On April 15, 2022, we entered into a term loan agreement with a group of financial institutions, which provided for a $600 million delayed draw term loan that will mature on April 15, 2025. As of January 31, 2023, we had $600 million borrowings outstanding under the term loan facility and had a weighted average interest rate of 5.40 percent.
There have been no changes to the principal, maturity, interest rates and interest payment terms of the Agilent outstanding senior notes in the three months ended January 31, 2023 as compared to the senior notes as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
Other
Our commitments for indirect material and services decreased by $19 million from $139 million as reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. These commitments are related to a variety of suppliers including IT support service providers. Our commitments to contract manufacturers and suppliers decreased by $33 million as supply issues improved from $1,043 million as reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. These commitments are related to a variety of suppliers, and we use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. These open purchase orders with our suppliers have not yet been received and our agreements usually provide us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the firm orders being placed. There were no other substantial changes from our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 to our contractual commitments in the first three months of fiscal year 2023. We have no other material non-cancelable guarantees or commitments.
Other long-term liabilities as of both January 31, 2023 and October 31, 2022 include $216 million, respectively, related to long-term income tax liabilities. Of these amounts, $99 million related to uncertain tax positions as of both January 31, 2023 and October 31, 2022, respectively. We are unable to accurately predict when these amounts will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitations or a tax audit settlement. As of January 31, 2023 the remaining $117 million in other long-term liabilities relates to the U.S. transition tax payment which is due in installments over the next three years.
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